- On 22 August, in Jackson Hole, Jerome Powell said that a weakening labour market could justify rate cuts.
- He said so even though inflation remained above target; stock markets reacted with strong rises.
- With rates falling in the US and stable in Europe, the differential favoured a stronger euro.
On 22 August 2025, in Jackson Hole, the chair of the Federal Reserve, Jerome Powell, said that a weakening labour market could justify interest rate cuts. He did so even though inflation remained above the central bank’s target, which showed a change in the order of priorities: the risk of weaker employment now weighed more than that of still-high prices.
When a central bank changes its message, markets react before any rate changes. Words serve to guide expectations, and expectations determine a good part of the price of shares, bonds and currencies. That is why a speech can move more money than a formal decision, and why it is worth understanding what the central bank has said, what it intends to do and what conditions must be met for it to do so. Listening to the speech carefully, without over-reading every phrase, is part of reading the environment well.
What Powell said
For Powell, a more fragile labour market could justify rate cuts, even with inflation above target. It was proof that the central bank was now giving more weight to employment than to the fight against still-high prices.
The Federal Reserve has a dual mandate: to maintain price stability and to promote full employment. When the two goals pull in opposite directions, it must decide which to prioritise at any given moment. Powell’s message indicated that, at that moment, the balance was tilting towards employment, without entirely giving up control of inflation and without committing to a specific timetable. Central banks usually leave several options open precisely so as not to tie their hands too early.
The market reaction
Stock markets reacted with strong rises. Lower rates make credit cheaper and tend to favour companies with debt and share valuations, and a mere change of tone from a central bank is enough to alter investors’ expectations.
That sensitivity to words has a delicate side: when markets price in a rate cut and it does not come, or comes with less force, the adjustment can be abrupt. It is therefore sensible not to build a financial plan on the hypothesis of a specific cut, but on a range of possibilities, and to review the plan when the data or the message change. A good plan withstands both a cut and the absence of one.
The differential and the euro
With rates falling in the United States and stable in Europe, the differential favoured a stronger euro. Anyone with income, assets or debts in dollars may be affected by that development, and it is worth bearing in mind when planning payments, receipts and investments in another currency.
A stronger euro makes what is bought in dollars cheaper but reduces the euro value of what is received in that currency. For a company exporting to the United States or a family with international investments, the difference can be noticeable. Reviewing with an adviser how much real exposure one has to the dollar, and whether one wants to keep it, is a useful exercise at any time. The exchange rate is rarely the main reason for a business decision, but it can noticeably alter the final result.
A central bank’s words move markets before its decisions do.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
